Consumer and Media Alert: The Small Print
That’s Devastating Major Consumer Rights

Most Consumers Never Even Notice “Mandatory Arbitration Clauses,”
Now Being Slipped Into Everything from Bills to Contracts

NCLC Seeks More Protections, Crafts Model State Law - Interviewee List

BOSTON – It may be in tiny print among the ads stuffed into your credit-card bill. Or a few lines buried in a multi-page health insurance agreement, home-repair contract or college loan. The language is often dense legal-ese, but make no mistake: It translates into a giant trap door for consumers.

Welcome to the astonishingly unfair and undemocratic world of mandatory arbitration clauses. All that small print and buried verbiage boils down to this: that by simply continuing to use your credit card or health plan, for instance, you’ve suddenly agreed to resolve all disputes arising with that company - even very serious ones - through binding arbitration.

This passive consumer “agreement” to arbitration is a rather shocking way to obtain what passes for “informed consent” to a truly momentous waiver of rights. And it’s only the start of the problem.

So beginning today, and in light of recent nationwide developments on this issue (details below), NCLC is calling on consumers and the news media to focus far more attention on the consequences of these clauses, which are spreading like wildfire across America.

A look at how businesses are using mandatory arbitration clauses says more about why they’re so disturbing. The kind of passive “notice” that locks consumers into arbitration increasingly ties them to a system that thoroughly stacks the deck when serious disputes arise. Companies alone select the arbitration service – often one dependent on them for repeat business. Those same companies often write the arbitration rules, and unsurprisingly those rules often demand complete secrecy about the proceeding and its outcome while limiting what evidence consumers can present. Consumers usually pay more for arbitration proceedings than they would for a public court proceeding. If they lose there’s no appeal -- that means even legal errors in an arbitrator’s decision are frequently beyond remedy. And if they refuse to participate in this rigged game these clauses often dictate they’ll automatically lose the dispute with no further recourse.

National Consumer Law Center advocates believe these clauses are the single biggest threat to consumer rights in recent years, a de-facto rewrite of the Constitution that undermines a broad range of consumer protections painstakingly built into law. No other consumer issue hits so many Americans where they live every day.

The reality of mandatory arbitration is slowly dawning on consumers. From a major Supreme Court decision just last month to a new California law, and across legislative to judicial arenas nationwide, the battle over these noxious clauses is being joined.

How This Spreading Wildfire Burns Consumers

Even a cursory investigation shows that these clauses are popping up not only in the agreements mentioned above but also in mortgages and other loans, phone bills, home construction and repair contracts, stock brokerage agreements, pest-control contracts, bank depositors’ agreements, college loans, mobile home purchases, employment agreements and many more.

Arbitration isn’t necessarily a bad thing if both parties agree to it after a dispute arises. It’s mandatory, pre-dispute arbitration clauses that are the problem. Not only are they often hard to find in agreements, they’re even harder to notice because so many routine transactions contain so much boilerplate language. And consumers aren’t on the lookout for a back-door attack on their rights in a dispute during a seemingly innocuous transaction prior to any dispute. The clauses just aren’t relevant to them then.

One example: An NCLC staff member recently -- and after the fact -- discovered such a clause in the “sign-in” papers of his elderly, desperately-ill father, who was being sent from a hospital to a rehabilitation center in Florida. What fair-minded person believes any family member would take issue at such a moment – or choose to go shopping for another facility than the one the hospital chose? The family member who’d traveled from afar to accompany the sick man says she never even noticed the clause when signing him in. She may well not have recognized its significance if she had.

To make things even more interesting the sick man’s medication regimen was somehow mixed up for the first week at the rehab center. Luckily no serious harm was done, but if there had been serious harm the rehab center would have already all-but-dictated the process for settling damage claims -- against itself. That’s a little like letting one side set the rules for the World Series, except the sportsmanship’s missing.

The business community loudly proclaims that these clauses are merely a private-sector alternative to the courts, a way of streamlining and speeding up the judicial process while controlling costs.

But one party to a public court proceeding doesn’t get to pick the judge, write the rules, limit the evidence and demand that testimony and outcomes never come to light. Unlike many arbitrators, judges aren’t dependent on one side for future business. And the costs of arbitration proceedings for plaintiffs at least -- according to a report by the consumer group Public Citizen -- are “almost always higher than the cost of instituting a lawsuit.” It can cost a consumer several thousand dollars just to have a complaint heard – a situation that remains true today despite industry claims that arbitration fees have fallen. Public Citizen says such costs “have a deterrent effect, often preventing a claimant from even filing a case……high arbitration costs can be used to bludgeon an adversary.”

The business community loudly complains about the supposed perils of class-action lawsuits – which many arbitration clauses specifically ban and which business is hotly trying to curb in Washington right now. In fact crowding out class actions is a main underlying reason for the rise of mandatory arbitration. But that smokescreen obscures a compelling counter-argument: Class-action suits are the only reasonable way to pursue many consumer ripoffs, especially small and medium-size ones. When arbitration fees can quickly exceed the amount of individual consumer claims, or when many are ripped off for small amounts, that makes those claims impossible to prosecute individually. And that leaves companies with a perverse incentive to rack up tens of thousands of small improper charges or other illegal fees – a crime wave of mini-heists and a major reason class-action protections exist in the first place.

There’s clearly a place for class-action cases involving larger-size ripoffs or wrongdoing as well. Businesses that do great individual harm to large numbers of consumers love to impose the burden of fighting on thousands of people separately – it usually limits the numbers who actually do so and thus the company’s overall exposure. And individuals are more easily whipsawed by aggressive lawyers, high costs and lowball payoff offers. Class-action suits can better make “the punishment fit the crime” – one of the most effective ways of deterring further egregious corporate behavior.

The Human Toll

There’s been some public exposure of this issue, and please note that the lawyers and others on our intereviewee list below offer fresh examples of those affected by these clauses. But here are just a few samples of the impact of this deck-stacking and forfeiture of rights in the real world:

-- After last month’s Supreme Court decision in the Green Tree Financial Corp. vs. Bazzle case, a decision involving mandatory arbitration and class-action rights that left both sides with something to complain about, The Financial Times of London described the growth of arbitration clauses this way:

“The past two or three decades have brought a silent revolution in American law: While lawsuit reform has languished in the legislatures, it has proceeded by stealth in the realm of arbitration..... Should those who give up their right to sue also give up their right to sue in groups? Should arbitration preclude the class action - that great democratic leveler that allows small claimants to take on big corporations?”

And the Times article had this to say of the Supreme Court’s decision:

“The majority said the arbitrator himself should decide (this question), placing substantial new powers in the hands of this already omnipotent individual and dashing the hopes of the business community that class action arbitrations would be outlawed altogether. 

“Legal experts say the court's decision is likely to provoke another round of lawsuits. Companies will start writing arbitration agreements that forbid class actions and consumers will be forced to sign them. Courts will then have to decide whether this second generation of arbitration agreements, sanitized of class actions, are so unfair as to be unenforceable. (italics provided)

“Yet, still,” the article continued, “no one has noticed. Americans have not realized how arbitration threatens to transform their experience as consumers and employees. They are not playing a democratic role in shaping that experience.
  “That is a shame: nothing has yet come of all the effort expended on tort reform in Congress. Some of that wasted effort should be diverted to the cause of arbitration. Real reform starts here. And it has already begun.”

Some examples of arbitration clauses’ real-world impact:

-- From the Dallas Morning News: “Mr. Wheeler and many of his 160 subdivision neighbors began noticing problems with their new homes about five years ago: cracked walls, broken windows, front doors that wouldn’t shut and buckling hardwood floors……..(But) Mr. Wheeler’s only legal remedy is to complain to a private arbitrator belonging to an association chosen by the developer. That would cost him a $3,000 advance fee, and he wouldn’t be allowed to appeal a loss. So he has given up.”

-- The Portland Oregonian reported on a local arbitration service head who refused to let consumer attorneys sit as arbitrators on private arbitration cases. But he then offered an arbitration case against a car dealer to an attorney who had defended car dealers. The service head told the Oregonian he was unaware of that attorney’s past ties……
..….but an in-depth San Francisco Chronicle investigation found such problems to be hardly uncommon. The Chronicle’s series, based on numerous actual cases, found that “individuals forced into arbitration may pay prohibitive fees, enjoy few protections against bias and receive legally dubious judgments that cannot be appealed……The result, critics say, is a second-class justice system in which obscure clauses buried deep in bank statements, phone bills and job applications deprive millions of people of their legal rights.” (This series may have played a role in the passage of California’s new law governing mandatory arbitration clauses.)

-- Syndicated radio commentator Jim Hightower recently told of his own experience receiving notice of a new arbitration provision in his credit card agreement from Fleet Bank. Hightower reports that ”Fleet's Notice practically shouted that if I filed any kind of claim against it for fraud, false advertising, invasion of privacy, or whatever it could deny me ‘the right to litigate that claim in court or have a jury trial on that claim.’ Instead, I'd have to go to an arbitration firm of Fleet's choosing, and ‘The arbitrator's decision will be final,’ even though ‘rights that you would have had if you went to court may ... not be available in arbitration’ and ‘the fees charged by the administration may be higher than the fees charged by a court.’

Read Hightower’s commentary at: http://www.jimhightower.com/air/read.asp?id=11019

-- Virginia consumer attorney Tom Domonoske (contact number below) tells National Consumer Law Center of a case where students of what turned out to be a sham computer-training school (the school took their money then closed its doors without doing the training) are having their claims against student loan provider Sallie Mae stifled by arbitration. The students are seeking relief from their Sallie Mae loans under a federal law that says their contract with the school also applies to their school-loan holder. But the law may never come into play here. “When we try to talk about that with (Sallie Mae’s) lawyer,” Domonoske says, “their lawyer says, ‘Well, we’re in arbitration, and we don’t think the arbitrator will apply the law.’ ” Notice how the law’s validity isn’t discussed here; just the fact that an arbitrator either can’t or won’t apply it in this case.

Heads I Win, Tails You Lose

As if gross conflicts of interest, high costs, insulation from class actions and the right to hide wrongdoing from public scrutiny aren’t enough, mandatory arbitration clauses often contain another significant double-standard: exempting business and business alone from the “mandatory” part. That means that while consumers may be barred from suing a business over a disagreement, the same business can sue the same consumer in court over the very same case! And this so-called “one-way” arbitration clause is the most common type!

Another glaring example of double standards in mandatory arbitration is the case of the auto dealers’ lobby. The dealers, claiming they were locked into an inferior bargaining position with the big auto makers they have to buy cars from, successfully petitioned Congress for relief from the mandatory arbitration the car makers required in any disputes with the dealers. But dealers won’t give the consumers who buy cars from them a similar break -- you can find mandatory arbitration clauses in loads of car purchase agreements, and just try bargaining those clauses out of these standard-form contracts!

Businesses also effectively limit consumers to arbitration while keeping their own options open by:

-- requiring that all disputes be arbitrated except the very disputes the business is likely to initiate – like a mortgage foreclosure.

-- requiring that any dispute above a certain price limit – say, $10,000 -- be arbitrated. That rules out most all class-action suits by consumers while allowing the business to pursue individual consumers.

Other problems:

-- The secrecy imposed in many arbitration agreements is one of their worst features. Secrecy rules ensure that no one else finds out about proceedings against a company, and especially about outcomes that expose corporate wrongdoing – a huge departure from the transparency of the public court system. Enforced secrecy about arbitration proceedings means that only business can track past decisions and whether individual arbitrators they may use again have ruled in their favor. Secrecy means rulings that may penalize corporate wrongdoing set no legal precedents, as they might in a court of law. And that means there’s less deterrence of future bad conduct. According to Public Citizen all this secrecy also means that “public discussion of the fairness of the ruling is discouraged, even if the case raises policy issues of wide concern.”

-- The “take it or leave it” nature of these clauses. Sure, companies will claim you don’t have to do business with them if you don’t like the clause – assuming you’ve seen and understand it. But are there really other options when the use of arbitration clauses is so widespread? Often the answer is no. And do you really want the decision our staff member’s family faced, to go shopping for a rehab facility different from the one recommended in the midst of a medical crisis? Or to switch credit-card or phone-service providers you may have had for years just because someone decided to slip a rule-change into your latest bill? Or even to travel to a second store or auto dealer once you’ve spent an afternoon selecting a new big-ticket purchase? How realistic is that?

-- Clauses requiring that any arbitration take place in a given location, often the company’s headquarters state. Would you travel from Atlanta or Los Angeles to Minnesota to dispute a $500 claim? Or even a claim for a few times that price?

Fixing the Damage

Any effort to fight this back-door ravaging of consumer rights must enhance consumers’ ability to either challenge arbitration clauses or keep consumer issues entirely out of arbitration. Consumers get a better deal and bad behavior is more effectively deterred when they and their attorneys can sue rather than arbitrate – the strength of that remedy is what gave rise to these noxious clauses in the first place.

National Consumer Law Center advocates believe the most durable fix for consumers will involve changing federal law, and that’s where much of our energy will be focused. But present realities dictate that other venues take precedence for the moment.

California recently passed, and Governor Davis signed, a strongly pro-consumer law governing arbitration clauses. Right now there’s state-level action on mandatory arbitration in North Carolina, Wisconsin, New Mexico, Oregon, and several others states as well. It is by no means uniformly consumer-friendly; versions of the Revised Uniform Arbitration Act (RUAA) circulating in some places would actually worsen existing protections. One of NCLC’s immediate tasks is to craft sound RUAA alternatives, and to that end NCLC will soon release a model state law that can be a template for state-level action. It should be available to advocates and consumer groups next week.

NCLC’s model state law would:

-- Limit conflicts of interest involving arbitrators
-- Prohibit many secrecy provisions governing the scope, magnitude and details of arbitration awards
-- Allow consumers with small claims to seek relief collectively
-- Require clear, up-front disclosure of potential arbitration costs and protect indigent consumers from excessive costs and fees
-- Preserve the right to judicial review in many cases involving insurance contracts, a particularly troubling area when exclusively governed by mandatory arbitration

Shining the spotlight on these abuses is also tremendously important. NCLC advocates are hoping members of the news media will use the list of interviewees below to increase their understanding of this issue and the many ways it harms those being herded into these grossly unfair deals.

***

Consumers, Consumer Attorneys & a Former Arbitrator
Who’ve Agreed to be Interviewed:

To the news media: It’s often hard to get consumers to speak publicly about their experiences with mandatory arbitration clauses – many are upset by what happened and still struggling with serious economic and other hardships resulting from their exposure to these clauses.

A list follows of consumers who’ve agreed to be interviewed, attorneys from several states who’ve agreed to talk about their cases, plus a law school professor and former arbitrator who can talk about her serious concerns with mandatory arbitration. These are only those who quickly stepped forward to speak; we may also be able to provide interviewees closer to where you’re working but be aware this may take time.

For an overview of this problem and proposed solutions nationally call the NCLC representatives listed at the start of this alert. Human stories and specific issues covered by those below are listed near their names.

POTENTIAL INTERVIEWEES:

-- Herbert Barnard of Florence, Alabama, 256-766-2625
-- Robert and Joan Porter of Sterrett, Alabama, 205-672-9848
-- Margo Rebar of Birmingham, Alabama, 205-970-6500
These individuals are clients of Attorney Thomas Campbell in Birmingham, Alabama, 205-278-6650. Mr. Campbell has handled a number of arbitration cases involving pest-control and other contracts and says “a big shock” for his clients has been the extremely high fees involved in the arbitration process. These fees had a strong impact on his clients’ ability and willingness to pursue these cases even though the damage many of them suffered was substantial.

-- Attorney James Moriarty, Houston, Texas – 713-528-0700
Mr. Moriarty is a consumer attorney with extensive experience in mandatory arbitration cases. He can discuss details of his cases plus the impact of arbitration clauses on his clients and the broader society.

-- Former arbitrator Celeste Hammond, a professor at John Marshall Law School in Chicago, 312-987-2366
Professor Hammond is a former arbitrator who became disillusioned by what she saw as serious flaws in the process, flaws that harm consumers and make arbitration exceptionally one-sided in favor of business.

-- Attorney Dan Hedges of Mountain State Justice legal services, Charleston, West Virginia, 304-344-5564
West Virginia has had an interesting experience with mandatory arbitration clauses -- judges there will no longer enforce them because they’ve been deemed unconscionable, and thus they’re no longer a factor in consumer cases. Mr. Hedges has handled many cases revolving around mandatory arbitration in West Virginia. He says that prior to this major consumer victory he usually attacked the bias of arbitration panels and the excessive costs of arbitration proceedings.

-- Sam and Lula Baldwin, Montgomery, Alabama – see number just below
Mr. and Mrs. Baldwin are fighting their ensnarement in a series of predatory loans, complicated by a mandatory arbitration clause that’s severely hindering their attempts to fight back. They can be reached through their attorney, Lance Gould of
Beasley, Allen, Crow, Methvin, Portis & Miles in Montgomery, at 800-898-2034. Mr. Gould also has other clients who may be willing to speak with the news media, and Attorney Thomas Methvin of the firm is available to discuss the range of arbitration cases the firm has handled and their impact on clients.

-- Paul Bland — Trial Lawyers for Public Justice, Washington 202-797-8600
Mr. Bland is very active in legal efforts to fight mandatory arbitration and is highly knowledgeable about the conflicts of interest inherent in these clauses, the lack of judicial review over the process, the impact of secrecy provisions on the public interest and the impact on consumers of arbitration’s high dollar costs.
(It should be noted that TLPJ is NOT dedicated to representing trial lawyers’ interests but primarily represents the public interest. Visit their website at www.tlpj.org)

-- Virginia attorneys Tom Domonoske 540-442-8616 and Dale Pittman 804-861-6000
These attorneys have handled numerous arbitration cases, including a group of more than 125 cases involving the student loan agency Sallie Mae and its obligations toward students taken in by, among others, a sham computer-training school. There are questions of whether Sallie Mae is avoiding legal issues involving its loans to those students by using mandatory arbitration clauses in the students’ loan agreements as a shield.

-- Kate Gordon – Trial Lawyers for Public Justice, Oakland CA 510-622-8150
Ms. Gordon compiles and regularly updates a list of legal cases nationwide involving mandatory arbitration. She can discuss the rulings in these cases and how they’ve harmed or occasionally helped consumers.